Category: Music Modernization Act

Now I never said that Music Modernization Act was a self-licking ice cream cone. That was someone else. Neither did I say it was the gift that keeps on giving. That wouldn’t have been me–it’s just getting started, after all. Too soon.

We are now having a look at the first of what will no doubt be many, many regulations to be issued by the Copyright Office that will actually implement the MMA. Wakey wakey.

Thanks to Senator Ron Wyden’s last minute looney tunes shakedown when the MMA was limping across the finish line in the Senate, the Copyright Office has circulated a notice of inquiry for the first MMA regulations promulgated by the Copyright Office. This time it’s regulations under Title II of the MMA for the new “license” request for “noncommercial” uses of pre-72 sound recordings. Never heard of this “license” before? Didn’t know it was in the MMA? Get used to it. If you’re like most people, you didn’t read the 200 page MMA before it passed, but you would do well to read it very carefully now that it is the law of the land.

The coming wave of regulations to be released by the Copyright Office will be your last chance to eject from the twilight zone–but file it under “M” for “maybe”. Because the die is cast and the Rubicon is crossed.

It must be said, of course, that the only reason we are having this discussion is because Google’s data farming Senator Ron Wyden threatened to put a hold on the MMA literally at the 11th hour and conducted an entirely predictable but no less grotesque legislative shakedown that is so typical of his Wydeness.

This didn’t come from the members of the House of Representatives who voted unanimously for the pure CLASSICS Act and it didn’t come from the other 99 members of the Senate who would have voted for the same House bill. No, this came from Senator Wyden and his motley crew from Public Knowledge, aka the Google shillery, the nutty professors and, we must assume, with the blessing of at some of the members of the Digital Media Association.

I want you to remember that after the entire industry burns thousands of productivity hours (not to mention lawyer time) in trying to define this stick in the eye. This is pure Google and pure, unadulterated Wyden. (We might call this the “Wyden loophole” but when it comes to loopholes, Senator Wyden is as fecund as the shad so that description wouldn’t narrow it down much.) Plus it’s the kind of “registration-based” thinking that is straight out of the Samuelson “Copyright Principles Project” and the much ballyhooed American Law Institute Restatement of Copyright, not to mention Lessig and Sprigman. But after all the handwringing, the pre-72 license is a big victory for the Restatement crowd and it’s the law of the land.

So–the MMA includes a Google “license” request for pre-72 recordings that allows a sound recording owner of a pre-72 recording to approve or disapprove a request for a noncommercial use of that recording. Sounds simple, right? Not so simple as the Copyright Office notice of inquiry confirms. It’s a ridiculously complicated loophole that may ultimately lead to no license being issued–and that’s when the handwringing will really begin.

However ridiculous this whole thing is, it is the law, so we must deal with it. We will have more to say about the proposed regulation in coming days, but a couple points jump right out–most importantly, the obligation on the user to clear the song in the recording before burdening either the Copyright Office or the sound recording copyright owner with a no-money clearance request.

But–musical works (aka songs) enjoyed all kinds of federal copyright protection prior to 1972, so the fact that a sound recording might be subject to the new loophole created by Senator Wyden says nothing about the song. So how does this fit together?

First, the Copyright Office needs to play a real vetting role in this process before the sound recording copyright owner even receives the request and there should be no direct communications between user and copyright owner. Let’s not repeat the mass “address unknown” NOI mistake.

Recall that the Copyright Office failed to vet any of the millions of “address unknown” NOIs for compulsory song licenses which allowed many of those notices to be filed improperly (in the millions, I would guess which sure sounds like a crime). This was such a debacle that it gave Big Tech a leg up in passing the MMA, rather than fix the mistake. We do not need a repeat performance of that catastrophe or even a curtain call.

But perhaps more importantly, there is no reason for anyone to spend a minute on these requests unless the user requesting the pre-72 license for a pre-72 sound recording can show that they have already obtained the rights for any musical work embodied in the pre-72 sound recording. All those hidden costs were well-covered in the CBO review of the MMA…oh, wait. They weren’t at all.

And, of course, when the MMA’s super-duper global rights database for every musical work ever written or that ever may be written is up and running in less than two years from now, it will be super duper easy to find these pre-72 songs, right? For free?

So why should anyone spend any time on a sound recording request if the song rights have not already been obtained since the sound recording is unusable without the song clearance and the song license is not included in the Wyden loophole? (So presumably an arms length market rate unless a compulsory license applies depending on the use, say sync or mechanical.) And there’s certainly no reason for a user to pay a Copyright Office examiner to review an application that cannot be consummated because the user has been unable to obtain the song rights. That would be unfair to the user.

If the user wishes to assert fair use as a defense to the rights of the song owner, then presumably they’d also assert fair use against the sound recording owner, too, so they problaby would not even apply.

Hence every application for the pre-72 use would almost by definition require a song license unless the work is already in the public domain (such as recordings of the traditional classical repertoire). Determining whether the song is in the public domain is exactly the kind of work the user should be paying the Copyright Office examiner to confirm.

So I’d say this “song first” approach makes sense, although I’m willing to be educated otherwise.

Like this:

When you’ve been around as long as the Harry Fox Agency, you’re going to make some enemies, screw some things up, over react and over reach. You’re also going to do a lot of things right, make some friends and do some good. But most of all, you’re going to be the whipping boy for your client’s enemies, screwups, overreacting and over reaching.

From one whipping boy to another, that’s just not fair and anyone who has ever tried to do anything really hard with data in the music business knows it. So pish and pshaw on those who gang up on HFA in the debate on the Music Modernization Act. Let’s look at the facts.

When HFA developed the first digital download mechanical license in the late 1990s, the current crop of critics were nowhere to be seen. Was it a perfect solution? Not entirely, no. But it did work and business got done and songwriters made money. We were all feeling our way along the digital precipice and making it up as we went along.

I will go out on a limb here and say that if it weren’t for people like HFA’s Ed Murphy, it’s entirely possible that there would be no “streaming mechanical” at all. That would be the same Ed Murphy who stepped up and licensed Napster’s effort at a p2p subscription service in 2001. Again, the current crop of critics were nowhere to be seen.

Here’s another fact that you won’t hear about. When it came time to mete out justice to a massive infringer record company who had been ripping off Texas singer-songwriters for years and years, it was HFA who stood with us. Not because they made money, not because there was some pot of gold for them–there wasn’t and they didn’t.

They did it because it was the right thing to do.

They may not be choir boys, but they have their moments. When we really needed them, they showed up for Texas songwriters. And that’s how we measure friendship in my part of the world.

HFA is often blamed for the Spotify meltdown which in its own way led directly to the controversial safe harbor in the Music Modernization Act. You can tell that’s true because the MMA’s proponents never talk about the safe harbor except to say that they negotiated away the rights of all the world’s songwriters in some “grand bargain,” the grandness of which elludes me almost as much as the legitimacy of consent.

The fact that Spotify chose to go forward without all the rights necessary to do business is not HFA’s fault. It is Spotify’s fault. If Spotify has an issue with HFA, that’s between them. Ultimately, Spotify knew what it was doing and I seriously, seriously doubt that HFA told them otherwise. I won’t believe it without both pictures and tapes.

Another fact is that the clearance problems that Spotify and some other HFA clients have were set in motion well before SESAC’s acquisition of HFA in 2015. If anything, HFA’s been doing it better and cleaner after the acquisition in my opinion. So if there is blame to go around, then the blame should go all the way around.

You may hear some pretty nasty comments about HFA now that its parent’s parent company is lobbying for a seat at the table on the Music Modernization Act. Pay them no mind. If SESAC and HFA had been dealt in at the beginning of the MMA process–which it sounds like they were not along with a lot of other people who should have been there, too–then there’d be some actual evidence that they were reneging on a commitment instead of no evidence that a commitment was ever made. If you’re going to bet the farm, don’t take silence as consent.

Bashing HFA won’t fix the failure to include them, and I for one think it’s really unfair. The solution isn’t dealing them out, the solution is embracing SESAC and HFA by respecting their efforts to make MMA a better bill that will have a greater chance of flourishing.

We’ve noted a few times that there’s a limited benefit to ASCAP and BMI from being involved with the Music Modernization Act (although fans of the bill have been dining out on their support for quite a while). All of those benefits involve relief from the oppressive government control over songwriters through the ancient consent decrees that now mostly protect the MIC Coalition.

We’ve also pointed out that the new head of the Antitrust Division of the Department of Justice announced his plan to terminate the some 1,500 consent decrees that the DOJ uses to regulate commerce–more properly the role of the Congress, not the Justice Department. Assistant Attorney General Makan Delrahim, the head of the Antitrust Division, has already said that he would review the ASCAP and BMI consent decrees, so this isn’t idle speculation.

This week, the AAG Delrahim put that plan in motion. According to a DOJ press release, the Antitrust Division is terminating 19 consent decrees that are like the PRO consent decrees, more regulatory in nature than enforcement oriented. Here’s the press release:

The Department of Justice’s Antitrust Division today filed a motion and supporting papers, seeking to terminate 19 “legacy” judgments in the District Court for the District of Columbia. Today’s court filing is part of the Antitrust Division’s effort to terminate decades-old antitrust judgments that no longer serve their original purpose.

“Today we have taken an important next step toward eliminating antitrust judgments that no longer protect competition,” said Assistant Attorney General for Antitrust, Makan Delrahim. “Today’s filing is the first of many that we will make in courts around the country in our effort to terminate obsolete judgments.”

In its motion filed today, the Antitrust Division explained that perpetual judgments rarely continue to protect competition, and those that are more than ten years old should be terminated absent compelling circumstances. Other reasons for terminating the judgments include that essential terms of the judgment have been satisfied, most defendants likely no longer exist, the judgment largely prohibits that which the antitrust laws already prohibit, and market conditions likely have changed. Each of these reasons suggests the judgments no longer serve to protect competition.

The Antitrust Division announced in April its initiative to terminate legacy antitrust judgments, stating that it would review all such judgments to identify those that no longer serve to protect competition. In its prior announcement, the Antitrust Division set forth the process by which it would seek the termination of outdated judgments. It also established a new public website (https://www.justice.gov/atr/JudgmentTermination) to serve as the primary source of information for the public regarding the initiative.

At the time that the Antitrust Division announced the initiative, it posted on its public website the legacy judgments in federal district court in Washington, D.C. and in Alexandria, Virginia. After a 30-day public comment period, the Antitrust Division concluded that termination of these 19 judgments is appropriate.

Since the announcement of its initiative, the Antitrust Division has posted for public comment judgments in 19 additional federal district courts. It will continue to post judgments periodically as review of those judgments by Antitrust Division attorneys is completed.

This is important because the latest version of the Music Modernization Act requires the DOJ to notify Congress if they intend to terminate the ASCAP and BMI consent decrees. Just the ones that relate to songwriters, no others.

So once again, the Congress–which should be regulating songwriters in the first place if anyone is going to engage in that worthless task–isn’t requiring the DOJ to notify them of any of the hundreds and hundreds of other consent decrees that AAG Delrahim proposes to terminate.

The irony of this amendment should not be overlooked–if the DOJ stops improperly regulating songwriters beyond its enforcement powers, oh, no! Congress must step in to defend the MIC Coalition’s multi trillion dollar market cap from those pesky anticompetitive songwriters.

Why should Congress butt in where it has been afraid to tread since before World War II? The same body that “forgot” to raise the statutory mechanical royalty for 70 years?

What should happen is the DOJ should terminate the ASCAP and BMI consent decrees and continue in its oversight role for enforcement of the antitrust laws. Surely this is not controversial. We don’t need another amendment to the Music Modernization Act to slow down “modernization.”

The Music Modernization Act is definitely the gift that keeps on giving. It seems like every time I read it, a new toad jumps out from under a rock.

The latest one I found is a new burden the MMA places on all sound recording owners, large and small, to help the digital services comply with their obligation to locate song copyright owners in order for the services to keep the new “reachback” safe harbor also referred to as the “Limitation on Liability”. This is the retroactive safe harbor given effect on January 1, 2018 regardless of when the bill actually is passed by both houses of Congress and signed by the President.

Here’s the relevant clause (at pages 100-101 of the House bill):

REQUIREMENTS FOR LIMITATION ON LIABILITY.—The following requirements shall apply on the enactment date and through the end of the period that expires 90 days after the license availability date to digital music providers seeking to avail themselves of the [reachback safe harbor]:

‘(i) No later than 30 calendar days after first making a particular sound recording of a musical work available through its service via one or more covered activities, or 30 calendar days after the enactment date, whichever occurs later, a digital music provider shall engage in good-faith, commercially reasonable efforts to identify and locate each copyright owner of such musical work (or share thereof). Such required matching efforts shall include the following:

(I) Good-faith, commercially reasonable efforts to obtain from the owner of the corresponding sound recording made available through the digital music provider’s service the following information:

(aa) Sound recording name, featured artist, sound recording copyright owner, producer, international standard recording code, and other information commonly used in the industry to identify sound recordings and match them to the musical works they embody.

(bb) Any available musical work ownership information, including each songwriter and publisher name, percentage ownership share, and international standard musical work code.

And yes, that is a double “good-faith, commercially reasonable” predicate–a drafting bugaboo of mine. I guess it means really, really, really good faith and absolutely positively commercially reasonable since they said it twice.

So what this means is that labels are required to provide to digital services a lot of song ownership information that they may or may not have. For example, if the label licenses in a sound recording and puts the publishing payments on the licensor (very common practice) the information might be “available” but it is just not available to them.

Note that despite the fact that “good faith” and “commercially reasonable” are repeated twice for emphasis, those concepts modify the efforts of the digital service and not the efforts of the label to respond. (Not surprising, if you believe as I do that the MMA was largely written by the lobbyists for the services and not the publishers or songwriters.)

At a minimum, the clause should be revised to extend the “good faith” and “commercially reasonable” modifiers to the label’s efforts to provide song information. Having said it twice, why not three times?

There’s also no procedure for how this request is to be made or responded to, nor is there reimbursement of the costs incurred by the label in complying. There’s also no limitation on liability for the label if it provides the service what turns out to be incorrect information.

Of course, what should really happen is that the entire paragraph (bb) should simply be struck. It has long been the practice of record companies to refuse to provide publisher information to digital services and it has long been the practice of digital services to not ask for it.

In all likelihood, the services will engage a third party to do their song research, which is covered in the very next clause:

(II) Employment of one or more bulk electronic matching processes that are available to the digital music provider through a third-party vendor on commercially reasonable terms, but a digital music provider may rely on its own bulk electronic matching process if it has capabilities comparable to or better than those available from a third-party vendor on commercially reasonable terms.

Taking a long look at the clause, it seems reasonable to simply strike the entire clause (I) and keep the labels out of it as has long been the practice, and require the services to either use their own systems or hire a vendor. And that’s where there should be some criteria for what constitutes a proper vendor. If there’s going to be any work done by the labels, then–as advertised–the digital services should pay the label’s cost of compliance as part of the assessment and the label should have no liability if they happen to not have the song information “available”–in a commercially reasonable manner.

We all want the MMA to work, but we also all want to avoid unfunded mandates imposed by the federal government that create unintended consequences.

This one exchange should give the lie to the usual cant we hear from lobbyists both in and outside the music business that we will never win against the broadcasters on terrestrial royalties because there’s a radio station in every Congressional district. There’s music industry in every state at least, if not every Congressional district.

The economic impact study concluded:

Combined, music business and music education directly account for over 95,000 permanent jobs, $3.6 billion in annual earnings, and just over $8.5 billion in annual economic activity, up from 92,000 jobs and about $7.5 billion in annual activity during 2015.

The ripple effects associated with the direct injection related to music business and music education bring the total impact (including the direct effects) to over 178,000 permanent jobs, $6.5 billion in earnings, and $19.8 billion in annual economic activity. The State of Texas also realizes over $323 million in tax revenue from these impacts.

In addition to the TMO economic impact study, you should also read Titan Music Group’s Austin Music Census that really drills down deep on the local impacts and has become a rally point for Austin musicians.

The Texas Music Office sets the gold standard for providing federal lawmakers with the information they need to defend the music industry as important job creators rather than an afterthought.

Senator Cornyn’s exchange should debunk forever the idea that there’s no support for music industry initiatives outside of New York, Nashville and Los Angeles, so nobody bothers to explain themselves to residents of flyover states.

Like this:

Let’s be clear–one reason why there are problems with mechanical licensing in the US is the loophole created by the government consent decrees that block ASCAP and BMI from issuing a “unilicense” for both performances and streaming mechanicals. I have argued for years that PROs should be allowed to administer existing statutory mechanical licenses for services that they already license on the performance side of the song. Personally, I think it is the main reason for creating the situation (such as the mass address unknown NOIs) that gets abused by the services like other loopholes.

“NSAI, for example, opined that ‘[t]he most efficient path to digital service providers obtaining necessary licenses would be to allow the PRO’s to license and collect mechanical royalties;’” “NMPA suggested that bundled rights could be sought directly from the music publishers that own and administer the song in question. But the PROs suggested that their existing structures could be leveraged to facilitate bundled licensing on a blanket basis, if only the consent decrees were amended.”

My view is that bundling should occur at the pubisher level and also at the PRO level for all publishers who do not license directly.

Remember–streaming mechanicals track the exact same song, the exact same use, the exact same copyright owners, the exact same transactions and the exact same services as the PROs already license on the performances. The PROs already have the most comprehensive ownership databases for songs and those databases are immediately accessible. This is likely to remain true for a long time.

The ASCAP and BMI consent decrees have been in place for decades. We accept them as a fact of life, something of an immovable object. For example, the only part of the Music Modernization Act that affects ASCAP and BMI relates to changes that these PROs evidently would like to make to the consent decrees but cannot get the Justice Department to address. (“Part” may be overstated–it’s about 1-1/2 pages out of the 151 page bill.)

But–what we were told at the outset of the MMA is that legislation to sunset the consent decrees would never pass due to the lobbying power of the digital media companies, the broadcasters, and the general business establishments. The MIC Coalition, in other words. And supposedly we can’t beat them, so we need to give up on that idea and take what we’re given and like it. (Good thing that guy was not at the Alamo, the Edmund Pettus Bridge, Thermopylae or the Battle of Britain. Horatius he ain’t.) This is, of course, entirely the wrong approach–if that thinking is not the ennui of learned helplessness, what is? As the Reverend Martin Luther King, Jr. said, “Ultimately a genuine leader is not a searcher for consensus, but a molder of consensus.”

No one considered what would happen if the consent decrees actually went away either entirely or substantially because the DOJ wanted them to. If that happy event came to pass, I would suggest that there would be little to nothing in the Music Modernization Act of any value or relevance to ASCAP and BMI. If anything, the collective established by the MMA is or could easily become a direct competitor of all the PROs which is likely why the broadcasters are “positively neutral” on the bill. I seriously doubt that any of them anticipated the consent decrees might go away.

Makan Delrahim, the new head of the Department of Justice Antitrust Division, may have just obviated any reason why the PROs should support the MMA or perhaps whether the MMA is even relevant.

During a speaking engagement on March 27 at Vanderbilt Law School, Mr. Delrahim gave us some insights into his plans for the ASCAP and BMI consent decrees in a discussion with Professor Rebecca Allensworth. As reported in Broadcasting & Cable he said:

“As public agencies we need to take a look and see if those consent decrees are still relevant in the marketplace,” which he was clearly signaling was up for debate. “If they have solved the competitive problem,” he said, “they could become anticompetitive tools over time[. I]f they were not necessarily the best ideas at the time, it doesn’t make a whole lot of sense for them to stay.”

Mr. Delrahim has put his finger right on the problem. In my view, the consent decrees have become weaponized–for example, the last head of the Antitrust Division was closely linked to Google and after an ostensible review of the consent decrees, suddenly launched into the absurd “100% licensing” episode to the great–albeit short lived–satisfaction of the MIC Coalition.

Not only is there serious competition in the PRO marketplace unlike it was in 1941 when the ASCAP consent decree started, the 2015 SESAC acquisition of the Harry Fox Agency actually demonstrates that if left alone, the marketplace will close the mechanical license loophole that the MMA purports to solve. There is no longer a need for the consent decrees, rate courts, none of it.

This isn’t to say that the PROs should get an exemption from the antitrust laws, far from it. But it does mean that the broadcasters, the MIC Coalition and the Digital Media Association should not be allowed to play with the “anticompetitive tools” of the entire consent decree apparatus.

So it appears that Mr. Delrahim thinks there’s actually a chance that the consent decrees could go away. If that happens, the PROs will have a golden opportunity to close the mechanical licensing loophole without all of the apparatus of the MMA. In that new world, the major publishers would possibly not have to continue to use pretzel logic to administer the rights in their catalogs and the PROs could provide coverage on everything else.

And unlike the MMA, that world would actually be getting the government further out of the lives of songwriters. It would avoid songwriters being beholden to the DiMA fox that would at least financially control the collective’s chicken coop.

It would also put to rest the ridiculous premise that the biggest corporations in commercial history need the government to protect them from songwriters–corporations that are themselves subject to antitrust enforcement, at least in Europe. And that may be the other shoe Mr. Delrahim could be dropping.

The famous old Russian proverb reminds us to trust but verify. That’s been the story in the record business since the cylindrical disc. All the “modernization” in the world will not soothe songwriter’s genetic suspicion of their accounting statements.

The collective to be established by the Music Modernization Act (“MMA”) undertakes the obligation to handle other people’s money. It quickly follows that those whose money the collective handles need to be able to verify their royalty payments from time to time. This has been an absolutely standard part of every royalty-based agreement in the music business for a good 50 years if not longer.

But like every aspect of the MMA, one has to always remember that while all songwriters may be equal, some songwriters are more equal than others. The MMA creates a two tier system–those who opt out of the compulsory blanket license by the mutual agreement of a rights owner and a digital service in the form of a voluntary agreement and those who do not. Those who do not have this opt-out right appear to receive payment directly from the collective instead of directly from the service–adding another set of hands and transaction costs. (It must be said that this group receiving payment under the compulsory blanket license will presumably also include those who currently have a voluntary license with digital services that is not renewed in future.)

The collective undertakes the responsibility of accounting should anticipate concerns of songwriters regarding verifying the accuracy of the statements and payments it renders. However, the MMA provides no supervisory oversight and in my view has a rather punitive black box clause that allows “unmatched” royalties to be paid on a market share basis to publishers, and then on to their lucky songwriters pro rata. This suggests that everyone who is in that lucky songwriter’s chain, like managers, business managers and lawyers working on a percentage basis may also get a share of these black box distributions in compensation.

So on the face of it, the MMA creates a relatively large category of people who have an economic interest in the black box. You can be cynical and think that they have an interest in the black box being as large as possible (meaning the accounting controls are as weak as possible), or you can agree with five-time Grammy winner Maria Schneider that if the “lucky” songwriters actually knew that they were being paid with money that belonged to the “unlucky” songwriters, they would be angry about that unfairness. Emphasis on the “actually knew”.

Or you could say, let’s not go either direction–let’s set up transparency and controls so that the incentives are properly aligned to create the smallest black box possible. No publisher needs the writer-relations headache of suspicious minds, and the collective should do what it can to be above reproach. Here are a couple solutions to increase the trust level: Add oversight of the collective by the Office of the Inspector General (as a quasi-governmental organand at least designated by the Copyright Office and operating under the control of the Copyright Office, and also tighten up the audit clauses in the MMA to treat songwriters auditing the collective the same as the collective is treated by the digital services.

The Inspector General

One way to make sure that the collective–a quasi governmental organization in my view–is run honestly is to make it subject to oversight review by one of the U.S. Government’s many Inspectors General. Rick Carnes of the Songwriters Guild of America suggested this to Rep. Doug Collins at the University of Georgia Artist Rights Symposium in a question from the floor.

For example, the Library of Congress (currently where the Copyright Office is housed) has an Inspector General. Since the Copyright Office has a lot to do with the creation and periodic review of the collective, they could save themselves a bunch of Freedom of Information Act requests from angry songwriters by having an Inspector General review the collective annually (or better yet, in real time).

My understanding is that giving an IG jurisdiction over the collective will require some enabling legislation, but I think it’s something well worth looking into. It would give the songwriters of the world a true-blue fiduciary to represent their interests as well as comfort that they had a line of appeal with some teeth short of expensive litigation.

Audits

The Inspector General is not in the current draft of the MMA, but audits are–both audits of the collective by songwriters and audits by the collective of digital music services. We’ll focus on audits of the collective in this post. It should be said that under the current compulsory license now in effect (i.e., pre-MMA), songwriters get no audit right, so the fact that there is an audit right at all is an incremental improvement.

Unfortunately, the MMA’s audit right still keeps songwriters away from auditing the right party–the digital services–and keeps that upstream data away from them. Plus, all audits under MMA appear to be subject to confidential treatment. I don’t think there’s a good reason to keep these secret. If a smart auditor finds a flaw in the collective’s accounting systems, that flaw should be disclosed and there should be an automatic true up of everyone affected.

But first, let’s realize what an “audit” actually is. It is a term of art in the music business and really means a “royalty compliance examination” which is solely focused on making sure that statements and payments rendered conform to the contract concerned, or in this case, the statutory requirements of the compulsory blanket license.

(It also must be said that as Maria notes, the MMA specifically exempts the collective from any responsibility for incompetent royalty accounting other than “gross negligence”, which usually means blatant indifference to a legal duty or something along those lines–assuming the collective’s board or employees actually have a legal duty to account correctly which it may not.)

The person conducting a royalty audit is typically not a certified public accountant as there is nothing about conducting this examination that requires a knowledge of Generally Accepted Accounting Principles (“GAAP”), financial accounting, or Sarbannes Oxley compliance. It is, in fact, quite rare for a royalty audit to be conducted by a CPA, and I’ve even had lawyers conduct an audit because the analysis involved is mostly that of contractual, or statutory, interpretation. Analysis of music industry-specific contracts is typically not part of the training of CPAs. So even if an auditor is a CPA, the skills needed to conduct the audit are typically learned through on the job training.

What is very common, however, is for someone on the receiving end of the audit to try to require the auditor be a CPA, arguably to increase the cost of the audit on the person owed money. CPAs often bill at higher rates than do royalty auditors, which creates a disincentive for audits. What is also common is for lawyers to think that every time they draft a clause about anyone conducting anything having to do with accounting, that they need to limit the person doing that examination to a CPA, because…well, because… This is what I call stupid lawyer tricks, and the CPA requirement is something that is routinely negotiated away in record deals and publishing deals if you have an ounce of leverage.

Here’s the preamble of the MMA’s audit clause for audits of the collective:’

A copyright owner entitled to receive payments of royalties for covered activities from the mechanical licensing collective may, individually or with other copyright owners, conduct an audit of the mechanical licensing collective to verify the accuracy of royalty payments and distributions by the mechanical licensing collective to such copyright owner

Remember–copyright owners under the compulsory are not allowed to audit the service, although the collective may audit the service. (And, of course, voluntary agreements are governed by their terms regarding audits and are not subject to the compulsory.)

Limiting the audit right to “copyright owners entitled to receive payments” means that if songwriters have an administration or co-publishing agreement, they will probably not be able to conduct an audit of the collective (even if their administrator or co-publisher is a board member of the collective). Because the audit is limited to “verifying the accuracy” of prior payments, the audit of the collective will not be able to look “upstream” to the service making the payment and may not be able to look at payments made to the collective, just the payments by the collective.

The audit shall be conducted by a qualified auditor, who shall perform the audit during the ordinary course of business by examining the books, records and systems of the mechanical licensing collective, as well as underlying data, according to generally accepted auditing standards and subject to applicable confidentiality requirements prescribed by the Register of Copyrights…

Again, I don’t think that the auditor needs to be both a CPA and have experience. Experience is enough. For example, if the auditor has performed audits for members of the collective’s board of directors, perhaps that would be enough.

The qualified auditor shall determine the accuracy of royalty payments, including whether an underpayment or overpayment of royalties was made by the mechanical licensing collective to the auditing copyright owner(s); provided, however, that before providing a final audit report to such copyright owner(s), the qualified auditor shall provide a tentative draft of the report to the mechanical licensing collective and allow the mechanical licensing collective a reasonable opportunity to respond to the findings, including by clarifying issues and correcting factual errors.

This clause is a problem. First, the auditor is hired–and has a professional duty–to find underpayments of royalties. That’s what they look for. The auditor does not have a duty to do the collective’s work for it and find overpayments. The auditor is not hired to find overpayments, they are hired to find underpayments.

The collective should hire its own accountants to review its royalty statements, and it surely will do so if it gets an audit notice. Otherwise the US Government is placing a heavy burden on the auditor and the copyright owners to look for overpayments as though the auditor played the role of a public financial accounting firm looking for accuracy on behalf of stockholders.

Plus, the requirement to force that auditor to give the collective the audit report before giving it to the people who hired that auditor is a bit much. Fair enough to meet and confer at the work paper stage to make sure there weren’t inaccuracies in the analysis, but that should not place any prohibition on whether the auditor’s own client can see the report first.

If this is really the role that the Government wants the auditor to play, then by all means let’s make any miscalculations by the collective available to the public and publish them in the Federal Register. Let’s not have the auditor’s findings subject to any confidential treatment. If that brings down a host of other audits or a need to restate millions of royalty payments, then so be it. Because we are not just looking for underpayments we are searching for the truth, right?

I don’t think so. And the next part of the audit clause shows why:

The auditing copyright owner(s) shall bear the cost of the audit. In case of an underpayment to the copyright owner(s), the mechanical licensing collective shall pay the amounts of any such underpayment to the auditing copyright owner(s), as appropriate. In case of an overpayment by the mechanical licensing collective, the mechanical licensing collective may debit the accounts of the auditing copyright owner(s) for such overpaid amounts, or such owner(s) shall refund overpaid amounts to the mechanical licensing collective, as appropriate.

Like so many other parts of the MMA, this is essentially an “ad terrorem” clause, or a right coupled with a penalty if it is exercised. What I think this means is that regardless of how much the underpayment might be–including both a material and nonmaterial amount–the songwriter bears 100% of the cost of the audit. The songwriter’s auditor has to look for overpayments (and bill their client for that extra review), and if the auditor finds any, the auditor has to report the overpayment. The songwriter then not only has to repay that amount (whatever “as appropriate” means), but also pay for the expense of finding it.

Compare this to the rights of the collective when auditing a digital music service:

The mechanical licensing collective shall pay the cost of the audit, unless the qualified auditor determines that there was an underpayment by the digital music provider of 10 percent or more, in which case the digital music provider shall bear the reasonable costs of the audit, in addition to paying the amount of any underpayment to the mechanical licensing collective. In case of an overpayment by the digital music provider, the mechanical licensing collective shall provide a credit to the digital music provider.

So what’s good for the goose is not good for the gander. When the collective is auditing upstream, the collective gets the benefit of that standard underpayment penalty. That means that the service has to pay for the cost of the audit if the underpayment exceeds a fixed percentage, in this case 10%. If there is an overpayment, the collective never has to repay the overpayment, just credit the account with an offsetting amount.

There should be no obligation on the part of the songwriter to have to find overpayments and if an overpayment is found in the normal course, it should simply be credited (which is the effect of the collective’s audit clause on songwriters downstream).

Songwriters should get the same underpayment protection on audit costs that the collective enjoys.

Appointing an Inspector General and cleaning up the audit clause would certainly make the MMA more fair for songwriters than it currently is.